Chicago Taken by Bots

By

Christine Marie Nielsen

Updated Oct. 25, 2004 12:01 a.m. ET

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CALM, COOL AND COMPARATIVELY colorless, electronic trading has all but extinguished the open-outcry mayhem of the nation's futures exchanges. About a third of screen-based transactions rely on artificial intelligence, once the stuff of science fiction, and now a popular tool in Wall Street's expanding arsenal.

As one financial-futures broker describes it, a computer, not unlike the mythical HAL of 2001: A Space Odyssey fame, can "see the algorithms and execute the trade faster than most people can point and click."

Open-outcry or pit trading is part of Chicago culture, and the futures industry has been a holdout in embracing electronic trade. Families hold multiple memberships at the two physical exchanges, the Chicago Board of Trade and Chicago Mercantile Exchange. And for many, being a floor trader is considered a birthright.

But eventually -- say, in about 20 years -- the "human element" will be almost completely removed, says Neal Weintraub, an instructor with the Chicago Mercantile Exchange. People will be needed merely to "oversee" the systems.

Artificial intelligence is the science of making "thinking" machines, especially computer programs. In the futures market, such programs marry trading concepts with statistical information about prices, relationships and other factors, in a bid to execute intelligent trades. As electronic memory grows cheaper, and computers faster, such programs accurately can process more and more information at increasingly lower cost.

Key Commodity Indexes

CRB Group Indexes

10/22

Prev. Wk

Yr. Ago

CRB Futures

286.55

285.59

245.33

Industrials

221.84

222.50

245.13

Grain/Oils

175.17

177.10

210.20

Livestock

287.31

288.28

256.11

Energy

610.03

576.72

334.49

Precious Metals

398.94

393.25

327.49

Reuters/CRB

Computer-trading technologies range from traditional "black box" programs based on entry and exit prices to advanced programs that learn from their own mistakes. And quite often, it is difficult for other market participants to tell whether a person or a machine has entered a trade.

Strategy Runner and Black Box Development both have developed advanced artificial-intelligence trading platforms for the futures market.

Anna Becker, co-founder and CEO of Strategy Runner, estimates that about 2,000 futures traders use automated trading systems developed by her firm, which was launched in 1999. The technology, she says, has helped veterans of the trading pits better compete -- because it provides a screen strategy for older pit traders and executes the strategy at a speed that allows them to compete with those who grew up using Gameboy.

While big institutional participants have embraced automated trading, Becker says, Strategy Runner's technology also gives a leg up to less-savvy retail traders, for example those who are currently only using the technology at entry and exit points, rather than using its full potential. Moreover, it helps reduce trading costs, and allows a single trader or a firm to implement multiple strategies in multiple markets.

One-year-old Black Box Development not only writes trading software, but the firm will specifically design software for a trader who presents what seems to be a profitable trading strategy. Black Box will also toss some capital into the pot, too, with an eye toward sharing in profits.

The Chicago firm, which says it's involved in "anything that can be traded electronically," relies on a team of 20 programmers and 10 researchers, mostly Ph.D.s in physics and math, notes Nancy Hope Cohen, Black Box's director of global marketing.

DJ-AIG Commodity Indexes

DJ-AIG Indexes

10/22

10/15

YTD

Commodity Futures

158.130

154.976

17%

Total Return

274.197

268.637

18%

Energy

407.899

386.384

59%

Petroleum

427.428

416.662

82%

Livestock

74.721

75.387

20%

Grains

47.434

47.889

-23%

Industrial Metals

91.494

92.498

9%

Precious Metals

77.844

76.432

6%

Softs

65.561

66.087

-9%

Dow Jones/AIG International

When artificial-intelligence-enhanced investment funds made their debut around 10 years ago, the results were, at best, uneven. Technology has made great gains since, although machines give no quarter to that vaunted "gut feeling" upon which so many successful traders have relied. "There are some things that humans can see, but are very hard to replicate," says Stephen Hill, vice president of the AIQ Systems Division of Track Data, a direct-access brokerage.

Help-wanted ads for derivatives-trading firms suggest machines will play a dominant role in the future; about 98% of current ads are for computer programmers. Yet, such firms would do well to remember that HAL's successors will have their limitations. Not even the most sophisticated computer programs can eliminate the potential for loss in any futures trade. That's because, at bottom, they're the handiwork of humans.

NATURAL GAS ROSE TO ITS HIGHEST level in over a year and a half as general-strength energy futures underpinned trade. The gains in natural gas come despite big supplies of underground gas storage, as the market is influenced by the high price of crude. November natural gas at the New York Mercantile Exchange gained 40.8 cents to $8.105 per million British thermal units, the highest price for a front month-contract since Feb. 26, 2003.

CHRISTINE MARIE NIELSEN is a reporter in Chicago for Dow Jones Newswires.

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